Can Spirit split cure Punch Taverns £3bn debt hangover?

Once Britain's largest pub owner, Punch Taverns starts trading today as two new businesses, in a desperate bid to tackle debt.

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The demerger, announced earlier this year, takes effect as from today. Spirit Pub Company, the split-off business, will take with it £113m and a selection of the group’s most successful pubs (which tend to be the ones majoring on pub grub) such as the Chef & Brewer and Fayre & Square chain.

The current Punch chief executive Ian Dyson, who will run the Spirit business, has referred to this as a shift from "quantity to quality". He will control 803 managed pubs and 549 of the better–performing leased sites from Punch. Pundits have speculated that this will mean an increase in smart gastro pubs, so expect to see more focaccia and fewer pork scratchings.

Bosses at Punch are hoping that the demerger will help investors recognise the value in the managed estate. Effectively a separation of the group’s ‘good’ and ‘bad’ companies, the move is a logical response to the challenge of how to detach a core of decent pubs from the crippling burden of £3bn debt accrued by Punch’s management during the boom years of the early and mid noughties.

And while no-one could claim that the pub business is a good one to be in at present, with a combination of the credit crunch, smoking ban and cheap supermarket booze all contributing to a closure rate of around 25 pubs a week, the fact is that Punch’s fall from grace has been particularly spectacular. A business whose management effectively lost sight of the fact that they were in the leisure business rather than the property sector, with predictably dire consequences.

Shares in the demerged Punch Taverns reflect the markets dim view of the rump of the business, losing more than three-quarters of their market value – trading around at 15.45p. The new Punch Taverns will take £2.3bn of the debt pile and 5,080 pubs, with plans to reduce this still further to about 3,000.

The Spirit Pub Company, by contrast, is doing rather better, trading at around 54.55p today. Punch shareholders will receive one Spirit ordinary share for each Punch ordinary share they hold.

As the end game in a sorry tale of poor management, investors seem to be giving the deal a cautious welcome, if only for the chance of starting again with a clean sheet which Spirit offers.

So could this be the aspirin required to finally banish Punch’s hangover? Perhaps - although some pundits are warning that the revamped Spirit Group could run out of cash if the economy does double dip. Time for a drop of Dutch courage for shareholders…

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